The economics of happiness

Can't buy it?

FOR the past half-century, those lucky enough to have been born in a rich country have had every prospect of growing richer. On average, incomes in Britain, America and Japan, adjusted for inflation, have easily doubled over that time. On top of this come the benefits of longer lives of better quality, thanks to advances in medicine and to a plethora of consumer goodies making living easier and more enjoyable. You might, even, expect folk to be a great deal happier today than in the 1950s.

You would be wrong, according to many surveys taken in rich countries. These tend to show that, once a country has lifted itself out of poverty, further rises in income seem not to create a meaningful rise in the proportion of people who count themselves as happy. Since the 1950s, for example, the proportion of Americans who tell pollsters that they are “very happy” has stayed constant at around 30%, while the proportion who say that they are “not very happy” has barely fallen. Explaining this paradox, and offering suggestions for increasing the supply of happiness, is the aim of a new book by Richard Layard, a professor of economics at the London School of Economics and a Labour peer.

Lord Layard devotes a good portion of the book to a summary of what is known about how to be happy. Much of it will appear self-evident: cultivate friendships, be involved in a community, try for a good marriage. But his big idea is controversial. It is that a zero-sum game of competition for money and status has gripped rich societies, and that this rat race is a big source of unhappiness. Put simply, one person's pay rise is another person's psychic loss. To make that loss worse, says the author, there are only so many top rungs on the ladder of status—and as a peer of the realm, Lord Layard should know.

He is among a growing group of economists who are dissatisfied with the way that the dominant neoclassical school of economics gauges well-being. When they try to divine human desires and happiness, mainstream economists look much more at what people do rather than at what they say. If, perhaps, you choose to work 90-hour weeks and skimp on leisure time, it follows that work is what makes you happy—or at least happier than taking extra time for leisure: otherwise you would not be doing it. Your actions, in other words, are said to reveal your “true” preferences, even if you tell a researcher that you would rather be spending more time with your children (what is known as your “stated” preference).

To counter such Panglossian logic, Lord Layard draws upon the findings of behavioural economists, who make use of the insights and techniques of psychologists. These are more inclined to give credence to people's stated desires and feelings. Among many things, the behaviourists have found that it is relative, not absolute wealth, that matters most to people. Mr Layard cites as evidence a study in which Harvard University students claimed to prefer earning $50,000 a year when their peers are on only $25,000 to a world in which they earn $100,000 while their peers get more than double that amount. The survey sample is anything but representative, but you get the point.

So, Lord Layard's thinking goes, by spending 90 hours a week in the office, you may be improving your own income, but you are also causing other people to feel less satisfied with theirs. They may be encouraged to work longer themselves just to keep up, taking from the time that gets devoted to family and community.

It is, the author argues, something similar to environmental pollution, where one person's action (or a company's) makes others worse off. Fortunately, he notes, economists have already figured out how to deal with such externalities: tax them so that the polluter internalises the cost of his actions. And so, near the top of Lord Layard's list for improving human happiness, comes the following recommendation: much higher rates of income tax to tame the rat race.

The author singles out income inequality as a psychic wound uniquely worthy of state intervention. But if raising the level of happiness is to be the chief aim of government policy, as he argues it should, where then is the call to make divorce harder, given the pain that he says broken homes inflict on children? Further, where is his desire to compel the worship of a higher being, also on his list as a source of happiness? Thankfully, both are absent, but he never mentions the obvious reason for why they are: namely, that most people value freedom as a greater good than enforced happiness. The pursuit of happiness, Lord Layard's book will convince most people, is a private matter.